Costco cuts a path into competition

THE US discount supermarket group Costco has committed a further $140 million to ramp up its burgeoning operations in Australia.

It is earmarking the money for the opening of three more warehouse-style stores in the region, which will place further competitive pressure on Coles and Woolworths.

The Australian arm of Costco is believed to have a second site in Sydney it is keen to acquire and build on. It also wants to expand into Queensland in the next 18 months.

Costco Wholesale Corporation, based in Washington state, sent $90 million in equity funding to Costco Wholesale Australia last year for its continuing start-up costs, including purchase of land and buildings, and has followed that with a second capital contribution of $10 million.

The US supermarket group, known for its warehouse format and steep discounts on groceries, clothing and other merchandise, enjoys its best growth outside the US in this country.

It has approved two additional capital contributions for its Australian arm totalling a further $40 million, documents obtained by BusinessDay reveal.

Costco's managing director in Australia, Patrick Noone, told BusinessDay most of the money would be used to open two to three new stores next year. ''We would like to do two [stores] in calendar 2013 ideally. We could do three but are likely to do two for sure,'' Mr Noone said.

''We have a couple of sites we are working on, one in Sydney [and] we do like the market in Queensland and would like to have a site up there in Brisbane next year.''

Costco operates from three warehouse stores in Australia.

Its first was opened in Melbourne's Docklands precinct in 2009 and was followed by its second at Auburn in July last year.

The third, next to Canberra Airport at Majura Park, was also opened last July.

''We are also now looking at a second store in Melbourne,'' Mr Noone said, ''and Adelaide is also an interesting area for us.''

Financial documents lodged by Costco Wholesale Australia show local consumers remain enthusiastic about Costco's membership model. Revenue from its three outlets reached $245.38 million in the 12 months to August 2011.

In the 2010 financial year, when it had only its Melbourne warehouse, revenue was $165.9 million.

This compares with the average American Costco store, which typically records annual turnover of $145 million.

Costco shoppers pay an annual membership fee of up to $60 to shop at the warehouse outlet, which

specialises in household goods and food in bulk, and whitegoods, furniture, alcohol and even luxury items such as diamonds.

Costco Inc recently increased its membership fees in North America. Mr Noone said there were no plans to raise fees in Australia.

He was reluctant to divulge the size of Costco's Australian membership base. But he said the group had more than 100,000 members in both Melbourne and Sydney and the new outlet in Canberra was proving popular.

The Australian operation is still mired in losses, however. Costco Wholesale Australia reported a loss of $13.21 million for 2011, up from a loss of $11.43 million in 2010.

It booked a loss of $2.36 million in 2008, when Costco entered the Australian market, and a loss of $14.13 million in 2009.

Costco's expansion in Australia has been slower than that of Germany's Aldi. Aldi has 265 stores on the east coast and aims to open between 25 and 30 more a year. Costco's rate of expansion is tempered by its ability to find large parcels of land that can accommodate a warehouse.

Although both companies only account for a small percentage of the nation's spending in supermarkets, as little as 2 per cent, they have attracted fans with heavily discounted branded and house-brand products.